Poland to Deliver First Rate Cut Since 2009 as GDP Slows

By Dorota Bartyzel -
Nov 6, 2012

Poland’s central bank will cut
borrowing costs for the first time since 2009 as the European
Union’s biggest eastern economy slows amid the euro-area debt
crisis, according to all 35 economists surveyed by Bloomberg.

The only central bank in the 27-nation EU to raise rates
this year will lower the benchmark by 25 basis points to 4.5
percent today, according to 34 economists polled. One predicted
a 50 basis-point cut. It was the first unanimous forecast for a
reduction since June 2009. The bank will announce its decision
after noon and hold a news conference at 4 p.m. in Warsaw.

While central banks around the world have eased policy to
avert a recession, Poland’s monetary authority raised rates by a
quarter-point in May after inflation exceeded its 2.5 percent
target for two years. Pressure to reverse the move grew after
economic growth slowed in the second quarter to the weakest
since 2009 and inflation eased.

“It would be a total shock if they didn’t cut rates,”
Piotr Bujak, chief economist for Poland at Nordea Bank in
Warsaw, said by phone yesterday. “Monetary easing is no longer
a possibility, it is an urgent need.”

Last month, the bank unexpectedly left rates at the highest
since 2009 for a fourth meeting, signaling that it may cut them
today if the economy slows further -- as confirmed by
statistical data since then. Industrial output shrank 5.2
percent in September, the first fall since May 2009, while
retail sales grew at the slowest pace since August 2010.

“The ground for easing has been prepared,” Gabor Ambrus,
an economist at 4CAST Ltd. in London, said by e-mail.

Currency Moves

The zloty traded at 4.1221 per euro at 4:45 p.m. in Warsaw
yesterday, versus 4.1173 on Nov. 5. The yield on zloty-
denominated five-year notes has fallen 1.44 percentage points
this year to a record 3.92 percent on Nov. 5 and is poised for
its best performance in a decade.

Three-month forward-rate agreements were 60 basis points
below the three-month Warsaw Interbank Offered Rate, implying
half a point in reductions by the end of January. In August,
they indicated expectations for a one quarter-point cut within
three months, data compiled by Bloomberg showed. Twelve-month
FRAs were at 101 basis points below the three-month Wibor,
signaling bets of four quarter-point reductions within a year.

New Projections

While the U.S. Federal Reserve is pursuing a third round of
so-called quantitative easing and the European Central Bank
unveiled an unlimited debt-purchase plan in September, Poland’s
central bank said last month it would await updated forecasts
before easing policy. New inflation and economic projections for
2012-2014 prepared by the central bank’s Economic Institute are
due to be released today.

Poland’s inflation rate was 3.8 percent for a second month
in September, while the fourth quarter should bring an “evident
decline” in the annual rate, “perhaps even to below 3 percent
by year-end,” the Finance Ministry said on Oct. 15. The central
bank’s 2.5 percent price-growth target allows a divergence of
plus or minus 1 percentage point.

“The November inflation projection will point to inflation
falling back to the target level of 2.5 percent around mid-2013,
aided by an economic slowdown and high base effects from this
year,” Maja Goettig, a Warsaw-based strategist at KBC
Securities, said in an e-mailed comment.

Governor’s View

Central bank Governor Marek Belka said on Oct. 12 in Tokyo
that “Poland’s economy is slowing enough to bring inflation
down to the central bank’s 2.5 percent target next year.” His
comment came after policy makers Jerzy Hausner and Adam Glapinski both said they were leaning toward cutting rates.

Another policy maker, Anna Zielinska-Glebocka, told PAP
newswire on Oct. 18 that a November cut “may open up a short
easing cycle.” Rate-setter Andrzej Rzonca indicated last month
that he may consider lowering borrowing costs if projections
confirm disinflation, the same condition Andrzej Kazmierczak
said on Oct. 19 that he “needs to be more convinced” about
before deciding on rates.

They all opposed trimming borrowing costs in September,
voting records released by the central bank showed. Elzbieta Chojna-Duch and Andrzej Bratkowski were the sole supporters of
motions to cut the rate by 50 and 25 basis points, respectively.

Another member of the 10-person Monetary Policy Council,
Jan Winiecki, said he sees “a greater chance” of a cut today,
according to an interview published in Dziennik Gazeta Prawna on
Oct. 19. Winiecki and Zyta Gilowska were both absent from the
September rate meeting.

‘Critical Year’

Prime Minister Donald Tusk’s government is sticking to its
2.5 percent growth forecast for 2012, while trimming next year’s
to 2.2 percent from a previously predicted 2.7 percent. Tusk
warned last month that 2013 “will be another critical year,
although nobody knows to what extent,” as the euro-area debt
crisis continues to damp growth.

Poland relies on the euro area to buy more than half its
exports, while the parent banks of five of its seven largest
lenders are based in the 17-nation currency bloc. The European
Central Bank forecasts a 0.4 contraction this year for the euro-
area economy. Poland’s economy expanded 2.3 percent in the
March-June period, the slowest pace in eleven quarters.

Poland’s central bank “is one of the last orthodox
inflation targeters,” Jaroslaw Janecki, chief economist at the
Warsaw unit of Societe Generale, said by phone. Nonetheless,
“pessimistic prospects for the real economy, combined with a
better inflation outlook, should provide sufficiently strong
arguments in favor of rate cuts.”